DSCR Loans vs. Conventional Mortgages — Pros and Cons?

[Kelly Schroeder]

I'm seeing more investors compare DSCR loans with traditional mortgages, especially when scaling.

For those of you who’ve used both:

- Did DSCR loans give you more speed/flexibility?
- Were the rates/terms worth it compared to conventional?
- Any pitfalls or things to watch for?

Would love to hear perspectives from both lenders and investors on which route makes more sense in today’s market.

[Jay Hurst]

Quote from @Kelly Schroeder:

I'm seeing more investors compare DSCR loans with traditional mortgages, especially when scaling.

For those of you who’ve used both:

- Did DSCR loans give you more speed/flexibility?
- Were the rates/terms worth it compared to conventional?
- Any pitfalls or things to watch for?

Would love to hear perspectives from both lenders and investors on which route makes more sense in today’s market.

DSCR loans are a great tool for those who need them—and only so-so tools for those who do not. If you have more than 10 financed properties or if you simply do not have enough verifiable income through either full documentation (pay stubs, tax returns, and rental income from the subject property) or even bank statements (for self-employed borrowers), then you need a DSCR loan—and in that case, it's a great option.

You will hear that they have "less red tape," but the reality is that you must provide almost everything a full-doc loan requires, except pay stubs, W-2s, and tax returns (though these may be required if you are self-employed or have other rental-income-producing properties). An experienced LO should be able to close a conventional loan in the same timeline as a DSCR loan—after all, the appraisal and title work take the same amount of time, and everything else should be completed while waiting on those two items.

When you hear that DSCR rates are the same or even better than conventional, what often gets left out is the additional upfront cost and the up to 5-year prepayment penalties it takes to get to that same rate. You will never pay a PPP on a conventional loan, and if you put the same upfront cost into a conventional loan as you do on the average DSCR loan, you can often buy the rate down considerably. The point is that the rate is just one part of the equation; all things equal, DSCR rates/terms are generally not as favorable as conventional.

The last thing to know is that DSCR loans do not require any licensing at all in most states—whereas conventional loans do. The issue here is that if the broker you are dealing with does not have a license (you can tell by whether their NMLS number is displayed or not) to originate anything but a DSCR loan, what product do you think you will be sold? Suitability may not matter—there is only one choice.

There is also a lot of bad information about how DSCR loans affect your ongoing debt-to-income ratio. You will often read that DSCR loans do not "count" toward your DTI when you want to buy a primary home. This is simply not true. But if the broker does not have a license, they are prohibited by law from doing primary-residence loans, so they may have no idea how it really works.

Finally, DSCR loans have no disclosure requirements like other types of loans. This opens the door to bait-and-switch opportunities for less-than-scrupulous brokers. Last-minute, unexplained changes to rates or fees are unfortunately becoming increasingly common in this space.

We have been doing DSCR loans since 2012—thousands of them. They are good products for the right borrowers, but they are often oversold to those who would qualify for better options.